City comment

City comment

Edited by Neil Collins

(Filed: 30/07/2004)

It's a big bite for bureaucrats

Even given the salaries at the Financial Services Authority (pay peanuts and you get. . .) £17m should cover quite a few of them, so it was a good day for the bureaucrats yesterday. The fine, levied on Shell for breaching the catch-all rules on "market abuse" looks modest compared with the $120m hit from the Securities & Exchange Commission in America, but everything's bigger over there.

In truth, the fines are a classic case of kicking the dog to punish the cat, since those in charge when Shell overstated its oil reserves have all gone (and we may be sure they have been well rewarded for their incompetence). Shell shareholders are writing the cheques and, as the American lawyers get going, they will be writing more and bigger ones.

Needless to say, there's no admission of liability, but the episode does raise the question of the role of regulators when incompetence like this comes to light. What good do the penalties do, and why not £1m or £100m? Would they have jumped in with fines had Shell's error been the other way?

Understandably, the payments rather overshadowed the figures yesterday, although they provided a useful diversion from further criticism of the stately timetable for reform at the top. For all the speed with which the previous chiefs were dispatched, this remains a supremely arrogant company, whose current bosses see nothing wrong with a November deadline for revealing their proposals.

They see no need to rush. The buoyant oil price is doing wonders for the downstream businesses where Shell always excels, and the Siamese twin structure with Royal Dutch is the perfect deterrent to corporate raiders - if any could contemplate taking on such a massive target.

The high price of the black stuff does bring its own problems, as Malcolm Brinded, who's now in charge of exploration, admitted. Shell is pouring money into exploring and developing its own finds, but acquisitions are eye-wateringly expensive. How he must regret letting little Cairn Energy make a fool of Shell by nicking the Mangala project in India, where more oil is being proved up almost daily. At £2.1billion, Cairn's market value is now enough to register even on Shell's radar.

Shell is an immensely strong company that will eventually come to terms with America's finest ambulance-chasing lawyers. Having conceded the principle, it will surely also impose an up-to-date management structure, even if it does seem to display all the sensitivity of a Louisiana mule to the views of its shareholders.

There need be no terror in a trillion

A trillion pounds is a lot of money. James Baker, when he was US Treasury Secretary, once famously remarked, as the spending demands came rolling in, that "a billion dollars here, a billion dollars there, and pretty soon you're talking serious money". A trillion is a thousand times greater - and our household debt is measured in pounds.

It's a number that is almost impossible to imagine. Even at today's relatively low interest rates, a trillion pounds accrues interest at about £50 billion a year, or getting on for £140m a day, £6m per hour, £100,000 per minute . . .

The debt which we now collectively owe is equivalent to £17,000 for every man, woman and child in the country, and put that way it suddenly doesn't seem so scary. Many a youngish family of four would be delighted to see their debts as low as £68,000, as they contemplate their six-figure mortgage and wonder how they'll ever be able to repay it.

The sum of £17,000 is also not vastly greater than the amount of public money spent per head of the population propping up the Scottish economy. While public spending in England was £5,500 per person in 2002-03, galloping Gordon plans to lavish £11,000 on every head north of the border next year. You might even suspect that he's a Scot.

The other difference is that while most of that money is spent, most of what we borrow is not: houses are assets with lasting value. The number may be big but there is no reason for the Bank of England to press the panic button simply because the trillion-pound milestone has been passed.

All we get is a fund of incompetence

What is the International Monetary Fund for? Its website drones on about promoting international monetary cooperation, exchange stability, fostering economic growth and high levels of employment. It's as controversial as apple pie. Yesterday, though, it admitted some of the blame for Argentina's economic collapse, where it failed on every single count.

So desperate was the IMF to sustain this beacon of emerging-market progress that it made a bad economy worse. Its men on the ground warned of the folly of using its funds (some of which we provide) to prop up the peso, but the Washington bosses knew better. The result was the biggest government debt default in history and misery for the citizens, whose savings - even the dollar-denominated ones - melted down.

The IMF doesn't go so far as an apology; it points to ham-fisted Argentine economic policy-makers, but without the IMF's money, reality would have arrived rather earlier, and would have caused less pain to the poor. A study last year confirmed that the IMF's policies have often failed, but yesterday's report shows they can make things much worse. While it's unthinkable that this institution, with 95pc of its workforce in grand new premises in Washington, would ever wind itself up, this report shows that if the IMF didn't exist, there would be no need to invent it.